Examining Income Inequality In America's Largest Metros

"What drags down our entire economy is when there is an ultra-wide chasm between the ultra-wealthy and everyone else," President Barack Obama, April 2012.

Intentionally or not, President Obama recently staked a claim in the debate about the relationship between income inequality and economic growth. Although there's no strong consensus among economists on this topic, cross-national research finds that, in general, countries with higher levels of inequality generally tend to have lower rates of growth. But that finding has to be taken with a grain of salt because the understanding that the relationship between inequality and growth tend to vary with a country's stage of economic development. High inequality is associated with lower growth in developing economies but with higher growth in mature economies.

This discussion isn't going to be over any time soon, but we can look to see how income inequality is related to the wellbeing of the average U.S. household across the 100 largest metropolitan areas in the U.S. Presumably, the differences in economic development across these metro areas is vastly smaller than differences between, say, Bangladesh and Canada. We specifically look to see how median household income in a metro area is related to how equally income is distributed across the households in that metro area. Data are drawn from the 2005-2009 American Community Survey 5-year estimates and reflect income levels and distributions from 2007; income inequality is measured using the Gini coefficient, and we break up the 100 metro areas into four groups of about 25 each (quartiles), ranging from those with most equally distributed incomes to those with the most unequally distributed incomes. (The Gini coefficient measures the dispersion of income on a scale from 0 to 1 where 0 indicates complete equality-everyone has the same level of income-and 1 represents complete inequality-one individual controls all the income. For the past decade the Gini coefficient for U.S. households has been between 0.46 and 0.47.)

Metro areas with lower levels of inequality tend to have higher average incomes. Median household income ranges from an average of $69,700 in the U.S. metro areas with lowest levels of income inequality, down to $62,700 (on average) in the metro areas with the highest levels of income inequality. Now income isn't growth, metro areas aren't countries, and we are just looking at one year, but this finding does fall in line with the President's narrative: in the US, the average household is doing better in terms of income if they live in a metro area where income is distributed more equally, than if they lived in a metro area with a more unequal distribution of income.

A closer look at the data reveals that the relationship between income and inequality here is largely driven by southern metro areas like McAllen, TX, El Paso, TX, Jackson, MS, and NO, LA, all of which have relatively low median incomes and relatively high levels of income inequality. Further, plenty of metro areas don't fall into the overall pattern. Boston, MA, for example, has a high level of income inequality, but also relatively high median household income.

This pattern implies that there are underlying differences between metro areas in their demographics, local economies, and social institutions which allow for better outcomes for the average working family and are associated with more equal income distributions. To examine this we compared low-inequality/high income metros-the 11 metro areas that have the most equal income distributions (i.e., in the most equal quartile) and the highest incomes (i.e., in the highest income quartile)-with high-inequality/low-income metros-the 18 metro areas that have the most unequal income distributions (i.e., in the least equal quartile), and below-median level incomes. We find that a far greater share of workers ages 25 to 60 have college degrees in low-inequality/high-income metros than in high-inequality/low-income metros (39 vs. 29 percent). Further, more workers are employed in high-skilled occupations like management, business, financial, computers, and math occupations in the low-inequality/high income metros than in high-inequality/low-income metros (22 vs. 15 percent). Racial and ethnic minorities make up a majority of the prime-age workforce in the high-inequality/low-income metros (52 percent) while only 24 percent of the workforce is either black or Hispanic in the low-inequality/high-income metros. Finally, low-inequality/high-income metros are in states with higher minimum wages and unionization rates, as compared with high-inequality/low-income metros.

These differences suggest potential avenues for policies to raise median incomes. Such policies solutions are elusive, but could include improved education and workforce development programs to help workers gain the skills employers need for more technology-intensive jobs and greater investments in public infrastructure, which could create well-paying, non-exportable jobs. Increasing employment and business ownership opportunities for African-Americans and Latinos could also help. Effective collective bargaining and minimum wages 10 to 20 percent above the federal minimum are also associated with higher incomes for average families across metro areas. And if average household incomes are on the rise, inequality may abate on its own, or at the very least become less of a concern.